Part 2: More on Bad Competitors...Silicon Valley is full of them

There is a strange phenomenon that I've encountered and it seems other people have had a similar experience [I was talking with veteran UK journalist David Tebbutt (Thinkerlog blog) last night about this].

I will sit down to write an article on a topic and I know what I'm going to write....yet I end up with something completely different. It's as if I'm "thinking" through my fingers. Until I sit down and start writing, I never know what is going to be the end product because the act of writing can change the article.

So, with the "Bad Competitor" post on Monday, I've been engaged in some online debate on this topic and I've realized a few things. I've realized that Silicon Valley is full to the brim with bad competitors.

By bad competitors I mean other companies trying to commoditize your business while defending their core business, thus everyone is vulnerable to a bad competitor, someone that can provide a product or service at a fraction of your costs.

So for the newspapers, an excellent service such as Craigslist, which monetizes less than one percent of its business, is a "bad competitor." There is no way newspapers can compete.

And there are thousands of startups in Silicon Valley that would absolutely love to be the "bad competitor" in their target market. In fact, that has to be the base line for any startup--that it can provide the product or service that is ten times as good for one-tenth of the price. Okay, this is just my rule of thumb, but you get the picture, the startup's solution has to be massively compelling to overcome adoption/switching costs.

Bad competitor startups will succeed because what they have is so much better than what is available, it is a no-brainer. And that is the way capitalism works--money finds the path of least expense--if it is allowed to.

And so the future leads to a form of capital entropy. Anything that has a cost structure high enough, that can be attacked, will be attacked. Any business that has high profit margins is extremely vulnerable to attack by a "bad competitor."

But bad competitors are only bad to the victim companies--the market loves them because the customers benefit. However, after many millions, billions of these challenges to accepted business models, at some point, we will reach a interesting point in the evolution of our global society. We will have come to a point of maximum efficiency--what happens then?

Let me put it another way. About 12 years ago or so, I remember the thrill of interviewing Dr. Eric Drexler, one of the pioneers of nanotechnology. And the interesting thing was that Dr. Drexler was not much interested in the mechanics or the science of nanotechnology.

He said that the way our industries are progressing: manufacturing, chip industry, chemical sciences, biological sciences etc, we would get our nanotechnology society sooner or later. At the time, he estimated about 15 years. Clearly, it might be another 15 years from now, but whatever--it is not a long period of time.

What struck me was this: he said, what happens when we can make anything ten times better for one hundredth the cost? How will that affect our society?

And that is exactly the path we are headed--what happens when we can make any product or offer any service for one hundredth of the cost and at least ten times the quality? What kind of society will we have?

Clearly, it will be a society that will be completely and utterly alien to ours. It will be a society where not everyone will have to work, in fact work will have to be redefined completely.

Will it be a golden age or a frightful age? I don't know, but that's where we are all headed and we will probably see it in our lifetime...